When I hear people talking about bankruptcy, one of the common questions that arises is people wanting to know how to overcome bankruptcy. My short answer, is to just breathe and take things one day at a time. Honestly, if you are in a situation where bankruptcy is your best option (and sometimes it is), then after you file and go through the process of having your debts discharged (Chapter 7), then you have a clean slate to start fresh. Yes, you will have higher interest rates until some time passes and you are able to re-establish your credit, but this will likely happen sooner than you think.
For those in serious trouble, it can actually help their credit to file for bankruptcy. It stops the collections, erases the debt (depending on the chapter) and helps you get off to a fresh start. I personally know a couple who bought a car 6 months later, and home 18 months after theirs was discharged. Sure the rate was higher, so they had to lower the purchase price to be able to afford the payments, but without the bankruptcy, they would not have qualified for any loans. You can do a search for attorneys in your area for more specific legal advice that is applicable to your specific situation.
The hardest part of filing bankruptcy for most people is the embarrassment and fear of judgment by people they know. The truth is that most people won’t know unless you tell them. The only way they’d find out is if they happen to see the tiny snippet in your local paper, or if they are searching your public records. If they are doing those searches just to be nosy, you can’t permit that, but honestly, that says a lot about their own character in my opinion.
Financially, here are some steps that will help you get back on your feet:
- Set up a budget. List all of your income and expenses.
- Account for every dollar you spend over the first 2 years. Remember you are trying to establish a firm foundation, so during this time it’s important to spend on needs, not wants.
- Make sure your expenses DO NOT exceed your income. As part of your bankruptcy, most, if not all, of your unsecured debt should be erased, leaving you with only secured debt. Typically, they have you restructure those loans with the lenders, to make sure you can afford your payments. So, if your expenses are still too close to exceeding your income, you may need to eliminate some and go without non-essentials, such as cable.
- Set up a savings account. We’ve had our share of financial issues. What got us through them for quite a while was our savings account. From the time I started working at 16, I started saving a minimum of 10% of my paychecks. I continued on with that as an adult, and when we had job losses, we relied on that money for food, rent, and basic utilities. Save as much as possible until you have at least 6 months worth of your income in a liquid savings account. It will be hard, but if a time comes that you need it, you will be thankful it is there!
- Establish goals. Plan ahead for any major purchases and holidays, etc. If you know you will need a new set of tires in 6 months and they cost $600. Find a way to save $100 per month. It is so nice to be able to pay cash for things. Not to mention, if you can’t afford $100 a month now, how are you going to afford a $600 hit in 6 months.
- Try to avoid credit cards and other unsecured debt. The offers will probably start coming in right away. They know you can’t file again for a very long time, so they are eager to offer you credit. This will probably be shocking since before you filed, they never would have considered you. If you decide to get one for emergencies. Leave it for emergencies, and that is not Starbucks, etc. If anything, set up one bill (insurance, etc) that you can pay via credit card that you’d have to pay in full anyway. Let them put it on your card, and then pay the card company instead of the original billing company. You’re still paying the bill (make sure you pay in full to avoid interest, etc!), it will keep the card active and show you are using it and paying it on time (pay on time!), yet it won’t raise your debt to income ratio because you aren’t carrying a balance.
- Learn to check your credit report. You can get free copies once per year, from each of the three reporting agencies. I advise getting one every 4 months. In month one, get it from Experian. In month five, get it from Transunion. In month nine, get it from Equifax. Check for errors and make sure things discharged are reported that way. If you need to dispute something, do it right away. Getting reports periodically helps keep you informed of any inaccuracies and will keep you motivated to stay on the right financial path as you see your credit score improving over time.